Indian JVs in Nepal

Published on: 2015-09-15 15:38:51
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--By Budhaditya Mukherjee

Scene Setting
I will briefly touch upon the current situation in Nepal from the industry perspective--Indian businesses, what we are and what exactly we bring to Nepal, issues concerning us and obviously how Nepal can be a preferred investment destination.

The current situation post earthquake from the industry perspective, the market has slowed down quite severely and a few industries are facing a negative down frame--we are not even flat, we are negative from last year. This is one area of grave concern to us. The earthquake has left a big scar, both on a psychological and financial level. It will take lot of time to heal.

Everyone is aware of the pre-constitution phase industrial chaos, and the bandhas and strikes; I was told today one person got shot in western Nepal. These things are hampering our business in Nepal.

The tourism sector is sluggish, some of us are aware, hotel occupancy is below 30 percent and the airport is not as vibrant as before the earthquake. These things have hampered the business sentiment, real estate has been stagnated, our plants are running under-capacity, margins are under pressure and overhead costs have stretched quite a bit with inflation rate at eight percent.

So, the scenario is gloomy, but we must say that the way Nepal has come up post earthquake is vey commendable, and all of us are very much hopeful for the future that we will see far better days.

Indian Business Houses
Indian business houses like ITC, Uniliver, Pepsi, SBI, Kansai group, National Insurance, Asian Paints, PNB, Dabur, among others are present here in Nepal. They generate an annual turnover of around USD 600 million and provide employment to more than 30,000 families directly or indirectly. So this is what we are, I will not get into the success stories as most of us are aware of them.

We have been here in Nepal for a long time and are deeply associated with Nepal and its people. We are committed to Nepal’s future.

So far we have had a good journey, but we feel that the journey could have been better if some of our issues were taken care of. Time and again, we have expressed these issues in various forums.

These issues can be divided into three categories: Issues that have strategic and long-term implications, issues related to operational hygiene and issues that are related to the violation of standard industrial norms. Please understand that these issues are not specific to Indian JVs; these issues are relevant to all manufacturers in Nepal.

Strategic, Long-Term Issues
The first thing I would like to point out under strategic issues is the need for investor friendly-labour laws for more productivity. Today we feel that the Act needs a lot of clarification and a lot of clear benchmarks for us to operate in a more productive manner. In the insurance sector, if we look at it today, we would like to have more tax considerations to make it more consumer-friendly. Power shortage, everyone is aware, increases the cost of production, if we generate electricity using fossil power. Today we are not going to discuss hydropower because there are other forums to do that. I would like to focus on manufacturing and services.

Intellectual property rights is one area which we would like the government to take a decisive action in. Internationally applied trademarks should be recognised here.

Sometimes we have import rejections for our capital item, raw material and consumable items, so handling of duty adjustment should be structured and made fast so that investors can recover losses quickly. Income tax rebate for re-investment should be one area you should look into. Preferential treatment, incentives for green projects such as waste water management and garbage management will encourage us to bring in new capital and good practices. These are the issues which have strategic implication and long-term impact.

Operational Hygiene
Now, moving on to operational hygiene. Our operational efficiency would improve if industrial areas such as Balaju and Hetauda were bigger. This would allow a faster turnaround, congestion could be cleared and this is very essential.
Proper labeling guidelines for imported products should also be implemented so that consumers can make informed choices, and investors can also focus more on consumer protection.

One issue that is specific to JVs is that we have limited trading permission from our parent companies. We cannot manufacture certain items in Nepal because of the economy of scale; it would not make economic sense to do that. Under the current law we cannot bring in those items from parent companies.

Next is primary and secondary packaging. Primary packaging is needed for the product. For example, you cannot sell soft drinks without a bottle, you just can’t do it. Primary packaging is as good as raw materials. So excise duty setoff for primary packaging needs to be there.

The other issue is with certain service related outward payments. As JVs, we have certain consultants from outside who we bring in to enhance operational skills of local employees. Those people remit outward, but doing that takes time and is not easy. This really needs the attention of the concerned authority. Customs duty rebate for re-export, longer transport window for Indian vehicles for hassle free operation are other things we would like to see.

Non Conformity with Norm
There are certain issues that have arisen due to non-conformity to norm. Take for example repatriation of dividends. If an investor invests in Nepal, he would like to get dividends from his investment. The dividend needs to be ploughed back to the mother company. The entire process is lengthy.

Strikes and labour unrest are there. Then infiltration of products through the open border is also a grave concern. This hampers investors here. That is something we need to take care of. Transport syndication unnecessarily stretches costs, and has to be avoided.

There are certain existing provisions, where we feel the interpretation should be investor friendly and logical. Of late, we have seen cases where vendors from whom we have taken service have run away and the government authority added that tax back on us; we are helpless- we did take the Vat bill from the vendors.

There are certain taxes that are impractical. For example for giving bonus to employees, we created a fund. Authorities are taxing something that we do not even own- advertising tax provisions are also a cause of harassment which we need to avoid.

Rental asset depreciation is another issue. If I rent out an asset to my distributor, disallowing depreciation is going to discourage me. There are certain holidays that the government declares. We also honour them. But in some cases industries can be exempted.

The other issue is computer billing. The IRD wants prior approval for use of software and the developer needs to submit the source code and architecture of the software. But, if we get software from foreign entities such as Microsoft which does not have a local agent, then we cannot do so. Today IRD is asking for the software’s audit log, but that would be a violation of intellectual property. But we applaud the government’s main reasoning that it should be transparent.

Opportunities
We also need to discuss the investment opportunity areas which we see as investors here. Tourism, infrastructure and agriculture are some of the areas. A lot of good things can happen in agriculture if it can be tapped. Nepal is extremely rich in herbs and as the world is moving towards organic revolution, it is the next big thing.

IT sector training, medical and health in big towns are also other areas. Also social media is the in thing today and if we look at its penetration, it is quite high. If the trade deficit is to be addressed, then manufacturing should be promoted.

Some of the suggestions from JVs could not be implemented in the government’s budget, but that’s understandable due to the earthquake. Hopefully in the future they will be addressed.

We are ready to act as Nepal’s ambassador to outside investors. We want to talk about success stories in Nepal. I will finish with a quote from Thomas Friedman:
“Our fate can be different; but only if we start doing things differently.”

Mukherjee is country director and general manager at Asian Paints Nepal and chair, Indian Business Forum. This is an edited version of his presentation at an interaction jointly organised by the Investment Board Nepal (IBN) and Nepal-India Chamber of Commerce and Industry on August 10 in Kathmandu.

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